RAMALLAH, West Bank, Dec 6 (Noah Browning/Reuters) - King Abdullah of Jordan visited Palestinian leaders in the Israeli-occupied West Bank on Thursday, congratulating them on a successful U.N. status upgrade in the teeth of Israel's threat to expand settlements.

Jordan is at peace with Israel and Abdullah is an ally of the United States as well as Western-backed Palestinian President Mahmoud Abbas whom he sees regularly in nearby Amman, where Abbas has a home.

Other Arab leaders do not travel to the West Bank because it is Israeli-controlled, but the King made the short trip - his second visit in about a year - from his capital by helicopter.

He is the first head of state to visit since an overwhelming majority of U.N. members last month implicitly recognized the state of Palestine.

The vote was followed immediately by an announcement from the Israeli cabinet confirming a plan to construct about 3,000 settler homes in the strategic E1 corridor near Jerusalem, which Palestinians say would lop the West Bank in two.

There was no public fanfare for Abdullah's visit, and no official announcements after Thursday's closed-door talks. The king flew in his helicopter back to Amman after lunch at the Ramallah compound of the Palestinian leader.

The world has rejected settlements as unconstructive and illegal and there have been condemnations from numerous countries to this decision, Jordanian Foreign Minister Nasser Joudeh told reporters in Ramallah.

Israel and the United States opposed the U.N. General Assembly's upgrade of the Palestinians' status to non-member state, saying Abbas should instead resume peace talks that collapsed in 2010 over Israeli settlement-building.

But Abbas received a huge boost at home from the U.N. endorsement. In contrast, when Abdullah last visited, in November 2011, the Palestinian president's popularity was at rock bottom after years of pursuing an elusive peace process while Israel continued to build settlements.

RIVALS

Abbas seeks a Palestinian state living side by side in peace with Israel. But with peace talks suspended since November 2010 he has been overshadowed by the muscle-flexing of the rival Hamas movement, the Islamist group that controls the Gaza Strip and preaches armed resistance to evict Israel from the land.

In a sign that his Fateh movement could heal a deep rift with Hamas, Abbas has won backing for the U.N. move from Hamas leader-in-exile Khaled Meshaal, who is due to pay his first visit to Gaza on Friday and can expect a hero's welcome.

Abbas calls Israel's E1 project an uncrossable red line.

Palestinian leaders have said they may seek a resolution condemning Israel for the move at the U.N. Security Council, where the United States would likely use its veto power.

We considers these steps a flagrant defiance of the will of the international community, which supported raising the status of Palestine to a state, and a clear assault on Palestinian land and rights, a West Bank cabinet statement said.

Israeli Prime Minister Benjamin Netanyahu, rejecting U.S. and European calls to reverse course on settlement expansion, has said Israel must defend its vital interests in a part of the West Bank that his pro-settler government would seek to hold on to in any future land-for-peace deal with Abbas.

What we've advanced so far is only planning, and we will have to see, Netanyahu told the German daily Die Welt.

Members of the U.S. Congress backing Israel have proposed restricting hundreds of millions of dollars in U.S. funding to the Palestinians and U.N. agencies recognizing their statehood.

The Palestinians have dispatched their U.N. envoy Riyad Mansour to oil-rich Qatar, which has pledged to cover their bills while Israel - as threatened - withholds $200 million in tax revenues the West Bank government needs to keep running.

As a reprisal for what it called a unilateral move to establish statehood without a peace accord, Israel announced it would hold back customs duties it collects on behalf of the Palestinians. It said the money would be used to pay the Palestinians' outstanding electricity bill.

An Arab League meeting set for the weekend in the Qatari capital Doha is expected to review the situation. (Reporting by Noah Browning in Ramallah and Michelle Nichols at the U.N.; Editing by Douglas Hamilton and Pravin Char)